Short squeezes in 2021 have led to down-and-out companies suddenly seeing soaring share prices. When one shorts a stock, they borrow the company's shares to sell to another investor. If the short-seller can purchase back the shares at a lower price (known as covering the short), they profit the difference.
Anything leading to a positive sentiment change in an organization, however, can push share prices higher, which leads to losses for short-sellers. This seduces some bears to cover their positions -- even at a loss -- to limit potential downside. Incremental share demand from this covering can then make available shares more scarce, which drives prices even higher. This is known as a short squeeze.
GameStop (NYSE: GME) and AMC Entertainment Holdings (NYSE: AMC) are among the group of troubled companies seeing a short squeeze. Both have produced mind-boggling returns in the last few weeks, and both are terrible investments. Here's why.
Source Fool.com